Fintech Poised To Disrupt The $14T Mortgage Market

January 23, 2017

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Financial Technology, or “Fintech,”
which has already disrupted the payments, banking and financial advisory
markets, is beginning to enter the $14 trillion mortgage market. Given the
growing popularity of digital financial solutions, there appears to be a demand
for electronic mortgage solutions among home buyers and sellers alike.

The U.S. mortgage market has been
dominated by several major players with Wells Fargo at the top and JP Morgan
Chase, Bank of America and US Bank not far behind. But since the 2008 mortgage
meltdown, the industry has been upended. Non-bank mortgage lending is expanding
as commercial banking declines. In fact, mortgage lending by type of
institution shifted dramatically between 2007 and 2014. Recently, commercial
banks provided 52% of mortgage lending, down from 74% in 2007. In 2014,
mortgage lending by non-banks almost doubled to 43% from 23% in 2007.

Where is that growth coming from?
Here's how fintech is gradually entering the mortgage lending market.

Fintech Players in the Mortgage Market

Radius Financial Group cracked
the fully paperless mortgage code in 2016. The firm, along with help from
DocMagic, the MERS loan registry, Fannie Mae and Santander Bank closed six
loans without paper documents. Radius used DocMagic and the MERS loan registry
to handle distinct parts of the process, showing the potential for automation
in document preparation and loan tracking.

Electronic closings and e-notes
aren’t new, as Fannie Mae and Freddie Mac have bought e-mortgages since the
turn of this century. Yet, the problem with these types of transactions is that
few warehouse lenders can purchase electronic mortgages, according to a recent
National Mortgage News article. This drawback is likely to change as more
companies enter the electronic mortgage market.

Clara, a California startup, aims
to solve some of the mortgage problems that plague consumers seeking to buy a
home. Founded by engineer Lukasz Strozek and Jeff Foster, a former policy
advisor at the U.S. Treasury Department, Clara strives to smooth out the
inefficiencies that accompany the mortgage lending industry. Clara
differentiates itself by educating borrowers and offering an online portal for
completing paperwork. The firm also maintains that its rates are lower than
competitors.

Lenda, a home-loan provider, also
offers a digital mortgage solution. Other digital mortgage lending services
include Quicken Loans' Rocket Mortgage. Then there’s SoFi, the fintech firm
known for student and personal loan services, which is also gaining ground in
the digital mortgage lending sphere.

A recent JD Power survey found
that 62% of respondents under 35 who bought a home this year stated that they’d
use a mobile app to complete a mortgage application, if available from their
lender. And 20% of buyers of all ages weren’t happy with their lender,
providing further support that there is demand for a new type of mortgage
service.

The Bottom Line

It is likely that there will be
more automation within the mortgage lending industry going forward – either
full service start to finish solutions or companies expediting a part of the
process through automation.

Mortgages are composed of many
moving parts, from the loan application and approval process, to appraisals,
completing and verifying borrowers' credit and loan application, as well as
completing and signing the final paperwork. In the end, like so many other
aspects of finance that fintech has taken on, there’s room for automation.
Reducing time, fees and face-to-face contact are an allure for the fintech
mortgage market. Ultimately, this new frontier seems to be gaining traction
with innovators and disrupters.